Small businesses that want to raise money and sell shares over the Internet moved a step closer to that possibility Wednesday when the Securities and Exchange Commission proposed long-awaited rules for crowdfunding — a move that won praise from lawmakers who have been pressuring the agency to act.
The SEC has grappled for months over how to best police the new market for crowdfunding, which will entail looser restrictions than the agency has typically allowed in securities offerings.
After a delay, the SEC’s 500-plus-page proposal seems largely to have stuck to directions from Congress.
“At first look, there isn’t anything in here that’s going to blow up crowdfunding,” said Chris Tyrrell, chairman of Crowdfund Intermediary Regulatory Advocates. “I’m sure there will be some wailing and grinding of teeth about some provision somewhere, but there hasn’t been anything that I’ve seen yet that gives me heartburn.”
Congress dropped the crowdfunding mandate in the SEC’s lap last year as part of the 2012 JOBS Act, which scaled back certain regulations in the name of allowing companies to more easily raise capital and grow.
After months of back and forth with the SEC, the crowdfunding industry has been eagerly awaiting the agency to press “go” on the new regulations.
Lawmakers have also been pressuring the SEC to write rules that are now technically months overdue. This week a bipartisan group of senators, including Sens. Jeff Merkley (D-Ore.) and Jerry Moran (R-Kan.), wrote to SEC Chairwoman Mary Jo White urging her to move forward on the crowdfunding proposal.
Republicans and Democrats in the House and Senate across the board Wednesday said they were pleased the SEC proposed the rules while reserving judgment on the substance of the proposal until their offices can pore over the text.
“I appreciate that the SEC is moving forward with this long-overdue crowdfunding proposal, which will ultimately help small businesses and entrepreneurs access capital and create jobs,” Sen. John Thune (R-S.D.) said.
A Senate Banking subcommittee chaired by Sen. Jon Tester (D-Mont.) next week will hold a hearing assessing the progress with the JOBS Act.
In July, the SEC finalized JOBS Act rules that lifted a ban on the public advertisement of private, unregistered securities offerings by hedge funds and others.
Unlike the split votes over those rules, the SEC’s five commissioners on Wednesday advanced the crowdfunding proposals in a unanimous 5-0 vote.
As with other JOBS Act rules, some of the tension underlying crowdfunding has been about removing barriers to raising capital while protecting investors.
“We want this market to thrive in a safe manner for investors,” White, the SEC chairwoman, said.
Under the JOBS Act, a company, such as a tech startup or a new restaurant, can raise up to $1 million per year in an unregistered securities offering.
They will have to post their offering on a website operated by a broker, or a “funding portal,” which is a new category established by the law. Brokers and portals will be regulated by the SEC and the Financial Industry Regulatory Authority, which already oversees broker-dealers. FINRA published its own proposed rules Wednesday after the SEC.
The amount of money a company could raise from any single investor would be capped. The JOBS Act says investors whose annual income or net worth is less than $100,000 can invest only up to $5,000. For investors making more than $100,000, the limit is 10 percent of their income or net worth, or $100,000 over a year.
SEC Commissioner Kara Stein said she wants more feedback on the investor caps, given “ambiguity” in the statute. Stein said she had concerns that seniors and others would be exposed to risks.
“If we don’t get it right, I fear the promise of crowdfunding will be lost,” she said.